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What Exactly Is Tesoro Corporation Up to in Alaska?

The oil refiner makes several moves that should probably be explained.

Tesoro Corporation(NYSE:ANDV) has agreed to sell off some of its storage and terminal assets in Alaska to Tesoro Logistics LP(NYSE:ANDX). The deal, which will bring Tesoro $444 million, includes 3.5 million barrels of storage capacity in Kenai and 600,000 barrels of storage capacity at terminal facilities in Fairbanks and Anchorage. The timing of the deal comes just weeks after Tesoro completed its acquisition of Flint Hills Resources' storage assets in Alaska.

It might seem inconsistent at first glance, but these moves do appear to fit into Tesoro's strategy for future growth.

The moving pieces

Let's first sort through the company's wheeling and dealing. In late 2015, Tesoro agreed to purchase Flint Hills Alaskan assets. That deal, which included the terminal facilities in Fairbanks and Anchorage, closed in June of this year. In Tesoro's press release announcing the deal, the company stated that it planned to offer these assets to Tesoro Logistics, the MLP it established in 2010.

As stated, Tesoro and Tesoro Logistics reached an agreement that has two phases. Tesoro Logistics will receive the Kenai storage assets in the first phase, which closed July 1, for $239 million as well as $27 million of equity in TLLP. The second phase, expected to close in the third quarter of this year, will provide Tesoro with the terminal assets for $160 million in cash and $18 million worth of TLLP equity.

There's a third deal, though, that is ultimately causing the most confusion. Because the Flint Hills acquisition made Tesoro such a large player in the Alaskan refining and storage market, it opened itself up to antitrust concerns. In order to close the deal, the Alaskan Attorney General ordered Tesoro to divest of its 210,000-barrel capacity storage terminal in the Port of Anchorage. The company has one year to comply.

In its latest press release regarding the divestment to TLLP, the company writes, "This agreement is related to Tesoro's acquisition of the Flint Hills Resources assets, which closed on June 20, 2016." This is referring to the arrangement that Tesoro would offer the Flint Hills assets to Tesoro Logistics, not that it satisfies the antitrust agreement.

The point is, expect to hear about a deal sometime within the year that Tesoro has divested or agreed to lease out its Port of Anchorage storage terminal.

Tesoro's strategy

Once you wrap your head around the deals,you have to wonder if this still fits within Tesoro's strategy. In a June investor presentation, Tesoro identifies some of its priorities as diversifying its portfolio, maintaining minimum cash on hand (at $600 million to $800 million), and continuing to drive strong cash flows.

The deal with TLLP helps accomplish all three. In 2010, refining drove 80% of Tesoro's business. In 2018, the company expects refining to generate 45% of its business, while marketing and logistics will generate 25% and 30%, respectively. This is made possible by adding valuable storage and terminal assets in markets such as Alaska.

Further, Tesoro's cash on hand had dropped from $942 million in the fourth quarter of 2015 to $439 million in the first quarter of 2016. This was primarily thanks to high capital expenditures and acquisition activities. The $400 million cash infusion will bring that number over the $800 million minimum cash expectation.

Another reason for the reduced cash, though, it that net cash flow from operations in the first quarter dropped, on an annualized basis, to $744 million. That's a significant and concerning drop from the $2.1 billion in net cash flow from 2015 and was driven in part by reduced refining margins. In addition to expectations that refining margins will increase, diversifying its portfolio with logistics assets will bring better stability to the company's cash flows and help protect it from future market shocks.

Foolish bottom line

Tesoro's strategic priorities are meant to create financial stability as well as generate strong future returns. By shoring up its position in the Alaskan storage and refinery industries, Tesoro, and its MLP Tesoro Logistics improved its balance sheet and diversified its already-strong portfolio. Remember that Tesoro is dealing with antitrust concerns in Alaska, which will lead to further divestments within a year, but that should resolve the issue. There are a lot of moving parts with the asset acquisitions and divestments to Tesoro Logistics, but they fit within Tesoro's strategy and should deliver growth opportunities into 2017.

David Lettis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.